Posts Tagged ‘DMC’

Interpretation of DMC apportionment provision and order for sale of defaulting owner’s shares

June 11, 2017

In Hertford Mansion (Un Chau Street) (IO) v Wong Shing Kwan ([2017] HKEC 1154, DC) the Management Committee of an Owners’ Corporation decided to carry out major renovation works at the property.

The building’s DMC provided that each owner would contribute the proportion of the expenses of managing the property set out in the Fifth Schedule to the DMC. This made the defendant liable for 110 / 1300 of any expenditure. The Management Committee demanded that proportion of the costs of the renovation works.

The Third Schedule to the DMC contained another charging provision. It required the owners to pay a ‘due proportion’ of management expenses including costs of repair, renewal and redecoration.

The defendant refused to pay the proportion of the renovation costs demanded of him. He argued that he was only responsible for a ‘due proportion’ of these costs and that the due proportion should be calculated (in the absence of any indication to some other effect) by reference to the proportion of the undivided shares in the building owned by the defendant. Thus calculated, the due proportion would be less than the sum demanded.

Judge Andrew Li rejected the defendant’s argument. The ‘due proportion’ (on a proper interpretation of this DMC) could only be the proportion specified in the Fifth Schedule. The Third Schedule required owners to pay a due proportion ‘in accordance with the provisions of this Deed’. The Fifth Schedule was the relevant provision of the deed for this purpose. It would be absurd to suppose that the Third and Fifth Schedule contained divergent mechanisms for apportioning exactly the same expenditure.

The defendant repeatedly refused to pay the contribution demanded. The DMC provided that unpaid sums were to be charged on the defaulting owner’s shares. The Management Committee registered a Memorandum of Charge accordingly. They now sought an order for sale of the defendant’s undivided shares.

The order for sale was granted. The DMC made the charge enforceable by the Management Committee. The defendant had ignored repeated warnings.

Michael Lower

Developer’s informal allocation of private parking space in the common area

May 20, 2017

In Faraday House (IO) v Shine Wheel Ltd ([2017] HKEC 957, LT) P was the purchaser of a flat in Faraday House in 1992. The estate was then a new development and she bought from the developer. She wanted three car parking spaces. Two of the spaces she was offered were allocated as private car parking spaces. The third space (‘the Adjacent Space’) was next to these spaces but was in the common area of the development.

The selling agent assured P that he would arrange for the developer to expressly acknowledge her right to use the Adjacent Space as a private car parking space (‘the Assurance’). P paid HK$250,000 for the two ‘official’ spaces and HK$50,000 for the Adjacent Space.

The Adjacent Space was never re-designated as an area for P’s exclusive use but P was issued with a Permission Letter allowing her to use the space. She was given three car parking permits. The owners incorporated in 1996 and a new manager was appointed at that time.

P used the three spaces for sixteen years until 2014. The owners’ corporation then demanded that she cease using the Adjacent Space. When P refused to comply, the corporation brought proceedings seeking an injunction preventing P from parking in the Adjacent Space. Parking in the common areas was a breach of the DMC.

The Lands Tribunal (Judge Kot) started from the proposition that the Permission Letter to use the Adjacent Space was a licence. The developer could not have granted a licence over the Adjacent Space since it had already been designated as a common area; the licence was invalid. Even if it were valid, it would be revocable; there were no equitable grounds for restraining this revocation. Even if it were irrevocable, it would not bind the IO which took over control of the common parts in 1996.

Promissory estoppel, the principles of which were most recently articulated in Hong Kong in Luo Xing Juan v Estate of Hui Shui See ((2009) 12 HKCFAR 1) could not help. The IO were not bound by an assurance given by the developer. The act of allowing P to park in the Adjacent Space for many years could be seen as an assurance. P had not, however, incurred any detriment in reliance on this (the HK$50,000 having already been paid).

Acquiescence was a possible defence given the nature of the covenants that had been broken. There had been an assurance or lying by on the part of the owners. It was not, however, unjust in all the circumstances to grant the injunction sought. P had had the benefit of the Adjacent Space over many years and would not be caused any hardship.

Michael Lower

Adverse possession by co-owner in breach of DMC

April 10, 2017

In Foremost Hill Ltd v Li Hon ([2017] HKEC 708) P and D owned adjoining shops in a building covered by a Deed of Mutual Covenant (‘DMC’). P had been in possession of part of D’s shop (‘the disputed area’) since 1981 (possibly earlier) due to a wrongly positioned partition wall. P claimed to have acquired title to the disputed area by adverse possession. The court agreed.

There was a clear ouster; P’s actions were incompatible with D’s right to exclusive occupation of the disputed area.

D also relied on the DMC covenant provisions conferring on each owner a right to the exclusive use of its own unit. Andrew Chung J commented that this effectively raised the question as to whether adverse possession can ever operate as between co-owners of units covered by a DMC ([25]).

The matter seemed not be covered by authority and should be approached from first principles.

An action to enforce the DMC term as a contractual term was time-barred after six years (section 4(1) of the Limitation Ordinance).

There was no limitation period for an action to enforce a restrictive covenant in equity but the doctrine of laches applies. The adverse possession began so long ago that it would be inequitable to allow D to enforce the covenant against P.

Andrew Chung J. also agreed with the proposition that since the action was, in substance, an action to recover land the limitation period in section 7(2) is engaged ([37]).

Michael Lower

Do owners of sub-divided units count as owners for general meeting purposes?

September 21, 2016

In Chow Chui Chui v Kafull Investment Ltd ([2016] HKEC 1889, CA) the DMC for a building divided the building by allocating 48 shares to a ground floor shop, 12 shares to each of the first to third floors (the ground to third floors being described as the ‘non-domestic accommodation’), one share to each domestic flat on the floors above the non-domestic accommodation and one share to the main roof and external walls. There was a first sub-DMC that sub-divided the ground floor into five units and allocated the 48 ground floor shares amongst these units. There was a second sub-DMC that sub-divided the units on the first and second floors of the building and divided the shares in the main DMC among the sub-divided units. Resolutions were passed at an owners’ meeting. Present at the meeting were fourteen owners from the non-domestic portion and two from the domestic portion. The question was whether the meeting failed to meet the quorum requirements in schedule 3, para. 5(1)(b) of the Building Management Ordinance (requiring that 10% of the owners should be present).

The contention was that only those who were ‘owners’ in accordance with the main DMC could be considered ‘owners’ for this purpose. Thus, there could only be 4 owners from the non-domestic portion (one for each floor). The Court of Appeal  (Kwan JA giving the Court’s judgment) rejected this contention. Section 2 of the Building Management Ordinance defines an ‘owner’ as one who appears from the Land Registry to be the owner of an undivided share of land on which there is a building. Section 39 of the Building Management Ordinance provides that an owner’s share is to be determined in accordance with a DMC registered at the Land Registry. Here, the shares had been attached to the sub-divided units by the terms of a sub-DMC, the owners of the sub-divided units had the right to exclusive possession and the Land Registry records confirmed their ownership ([35]). They were owners and, as a result, the meeting was quorate.

There was nothing to limit the Ordinance’s references to a ‘deed of mutual covenant’ to the main DMC ([39]) especially where, as here, the main DMC contemplated the possibility of sub-division. In fact, it is enough that the main DMC does not prohibit sub-division ([40]).

Michael Lower


Building management: Management fee for handling renovation works needs owners’ approval

September 9, 2016

In Flora Garden (IO) v Li Do Wai ([2016] HKEC 1830, LT) the owners’ meeting approved the carrying out of renovation and improvement works at the estate. The incorporated owners added a 10% fee on top of the cost of the works to cover consultancy, contract and administrative fees and other ancillary costs (‘ancillary costs’). The owners’ meeting had approved the cost of the works but not the ancillary costs. When the works were complete, each owner was asked to pay the due share of the cost of the works including the ancillary costs. Deputy Judge Kot held that the ancillary costs could not be charged to the owners. They had not been approved by the owners nor had this aspect of the works been put out to tender. The incorporated owners’ submission that owners had paid such costs before without express approval and that this practice provided the necessary authorisation failed ([33] – [36]).

The DMC authorised the owners’ corporation to levy a 5% surcharge on late payers as well as a collection charge of HK$150. A demand for these sums was made of the owners who had paid late. They argued that these sums were a penalty and so irrecoverable. This argument failed. It did not matter that the sums were not a genuine pre-estimate of loss. The surcharge clause protected a legitimate commercial purpose of the incorporated owners and was not extravagant or unconscionable in amount ([47] – [48]).

Michael Lower

Acquiescence: Is a history of non-enforcement of DMC terms relevant?

March 2, 2016

In Freder Centre (IO) v Gringo Ltd ([2016] HKEC 418, CA) the owners of units in a commercial building placed a sign with a trade name on part of the external wall of the building. This was a breach of a term of the DMC prohibiting the placing of signs anywhere on the building except in spaces assigned for that purpose (the sign was not in an assigned space). It was also a breach of the covenant implied by section 34I of the Building Management Ordinance not to convert any common part to private use without the consent of the owners’ corporation.

In its defence, the owner of the units relied on acquiescence. The terms were of such a nature that acquiescence was possible; the space could have been made an assigned space, the owners’ corporation could have consented to the private use of the common part. The question was whether there had been acquiescence. The owners’ corporation had informed the owner of the units of its objection as soon as it learned of the breach. Looking at the incident in isolation, they could not be accused of standing idly by when the breach was committed. Gringo Ltd, however, pointed to the fact that the corporation had a long history of tolerating such breaches. It was this history that it relied on as amounting to an acquiescence. The owners’ corporation said that its limited resources meant that it could not bring proceedings in respect of all of the past breaches at once; it had a policy of concentrating on recent breaches.

The owners’ corporation’s argument had succeeded at first instance but was rejected on appeal. Chu JA giving the Court’s judgment said:

‘In our view, the fact that nearly all the other owners or occupiers of basement and ground floor units have for many years committed similar breaches, and the applicant has never taken any enforcement action or proceedings against them suggests that the breaches are prevalent and have over the years been tolerated by the applicant. This is directly relevant and germane to whether there is assent or lying by on the part of the applicant and whether it is unjust to grant the injunctive relief against the respondents.’ ([28]).

There had been acquiescence and  it would be inequitable to grant the injunction sought.

Michael Lower

Manager’s DMC duty to bring legal proceedings where necessary: enough to act reasonably?

September 23, 2015

In Long Source Industrial Ltd v Guardian Property Management Ltd ([2015] HKEC 1964, LT) Guardian Property Management (‘GPM’) had been appointed manager of a development at Tai Po Kau. There is no owners’ corporation. The applicant, Long Source Industrial (‘LSI’), was an owner of the development. The owners of several houses had extended their rear gardens to incorporate common parts and a surface channel had been altered. LSI began proceedings in March 2013. At that time, GPM’s view was that the matter was in hand: it was monitoring the progress of rectification works and was liaising with the Buildings Department on the progress of its enforcement action. Subsequently, some owners were prosecuted and the owners of most of the houses had complied with the Building Orders issued by the Buildings Department by the time of the hearing.

The DMC contained the following provisions concerning the responsibility and powers of GPM as manager of the development:

‘the Manager shall be responsible for and shall have full and unrestricted authority to do all such acts and things as may be necessary or requisite for the proper management of the Development’.

For this purpose, it had the power to bring legal proceedings to enforce due observance and performance of the DMC terms by the owners.

LSI sought an order compelling GPM to bring proceedings against the owners in breach. The LT declined to grant this injunction. While the words ‘necessary or requisite’ were not expressly qualified by the word ‘reasonably’, it was enough for GPM to act reasonably here. It had acted reasonably. Even from the perspective of March 2013, GPM was acting reasonably. At that time, many of the owners were taking steps to rectify the breach. It would not have been managing the funds of the development properly, as it owed a fiduciary duty to do ([36]), had it commenced proceedings at that time.

Michael Lower

Property owner in breach of a covenant not to ‘permit or suffer’ a nuisance to be caused

September 16, 2015

In MTR Corp Ltd v Cheung Ching Kin ([2015] HKEC 1535, LT) MTR Corp (the applicant) was appointed Manager of an estate in Tseung Kwan O. The respondent was the owner of a flat on the estate occupied by his daughter (he had moved out). There were persistent and well-documented complaints of frequent loud hammering noises in the flat in the late night or early hours of the morning. The Tribunal had no hesitation in finding that these noises amounted to a nuisance. The applicant sought an injunction to restrain the nuisance. The relevant provision prohibited owners from doing anything which might be a nuisance or cause damage or annoyance to other owners and occupiers or to the public. There was also a prohibition on producing music or noise that might cause a nuisance to other users of the development. These covenants were extended; owners could not ‘permit or suffer’ a breach of the covenant. Here the noise was produced by the owner’s daughter, not the owner himself, so the question was whether he had permitted or suffered his daughter to cause the noise.

In Realty Harvest Limited & Others v Gold Margin Development Limited ([2001] 1 HKC 234, CA) the Court of Appeal endorsed the proposition that ‘permit’ and ‘suffer’ are synonyms. ‘Permit’:

‘ means one of two things, either to give leave for an act which without that leave could not be legally done, or to abstain from taking reasonable steps to prevent the act where it is within a man’s power to prevent it. Acts which fall short of that, though they be acts of sympathy or assistance, do not amount to permission at any rate in the covenants with which we are dealing.’

(Berton & Others v Alliance Economic Investment Company Limited [1922] 1 KB 742 at 759 per Atkins LJ).

The owner needs to know of the breach before he can be said to have permitted it ([38]). The owner knew of the breach and had taken no steps to prevent the noise problem from continuing. The injunction was granted.

Michael Lower

Liability of Incorporated owners selling items left by residents in common areas

January 27, 2015

In Desir Anthony C v Knight Frank (Services) Ltd ([2015] HKEC 44) a resident in a building (‘D’) left bicycles in a common area of the building. The building’s DMC allowed the Owners’ Corporation to appoint an agent with a duty, among other things, to prevent people from occupying common areas. The DMC did not authorise the sale of items unlawfully left in common areas. The Management Company issued a series of circulars, followed up by ‘Final Notices’ requiring D to remove the bicycles or accept that the management company would remove and dispose of them. The bicycles were removed and, after a series of further exchanges, sold. The main question was whether this sale was lawful.

It was not lawful. The Incorporated Owners were involuntary bailees of the bicycles ([80]). An involuntary bailee who sells the bailor’s goods is liable in conversion unless the sale is carried out in good faith and with reasonable care ([82]). Further, the bailee was not entitled to dispose of the bicycles merely because they had become a nuisance and the bailor had rejected the opportunity to collect them. A disposal was only lawful where there was an actual commercial necessity, the bailee acts prudently and in good faith and has been unable to communicate with the bailor before the disposal (a sale on these grounds is lawful in the case of goods that are deteriorating or depreciating in value but is unavailable where the disposal is solely for the bailee’s benefit) ([83]). In the absence of a provision in the DMC authorising the disposal, the sale was prima facie an act of conversion for which the Incorporated Owners were liable ([88]). The bicycles could only have been sold if this were in the bailor’s interests but this was not the case here. The sale was motivated by the desire to be rid of the nuisance of storing D’s bicycles. There were no legal grounds for the sale. ([97]). The Incorporated Owners were liable in conversion and were ordered to pay D the value of the bicycles at the time of the sale ([106]).

Michael Lower

Closure of basement parking area during renovation works

January 12, 2015

In Tung Lo Court (IO) v Leung May Chun Alison Aliance ([2014] HKEC 2104, CA) the basement of the building (which included the car parking spaces) had become dilapidated and the incorporated owners decided to have repair and renovation works carried out. Once the work had begun there was an unanticipated problem when the basement was flooded with underground water. The contractors took advice and they were told that safety demanded that the basement be completely closed for four months. The incorporated owners followed this advice. L contended that this closure amounted to a breach of the DMC and also constituted a nuisance. The Court of Appeal rejected this. Given the strong advice that they had received about the risk to safety, it was reasonable for them to have closed down the basement ([31.1]). It was also legitimate to bear in mind the complicated legal issues that might have arisen if someone had been harmed or suffered damage to their property had the basement remained open; it would not have been clear whether the liability was that of the contractor or of the incorporated owners ([31.2]). It was also legitimate to base the decision on financial considerations; closing down the basement meant that the work could be done more quickly and at a lower cost that would otherwise have been the case ([38.4]).

Michael Lower